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Edwards Construction currently has debt outstanding with a market value of $67,000 and a WACC of 10 percent
Edwards Construction currently has debt outstanding with a market value of $67,000 and a WACC of 10 percent. The company has EBIT of $6,750 that is expected to continue in perpetuity. Assume there are no taxes. (Please show all related working steps)
a. What is the value of the company's equity? What is the debt-to-value ratio?
b. What are the equity value and debt-to-value ratio if the company's growth rate is 2 percent?
c. What are the equity value and debt-to-value ratio if the company's growth rate is 4 percent?
Expert Solution
We have been provided with the information that,
has debt outstanding with a market value of $67000
cost of 10 percent.
The company has EBIT of $6,750 that is expected to continue in perpetuity.
(a.)
Value of company's Equity
= EBIT/ke
= 6750/0.10
= $67500
Equity Value = 67500 - 67,000 = 500
(a-2)
Debt to value ratio
= $67000/$67500
= 0.9926
b.
Firm Value = 6750(1.02)/(0.10- 0.02) = $86062.50
Equity Value = 86062.5 - 67000 = $19062.50
Debt to Value = 67000/86062..5 = 0.7785
c.
Firm Value = 6750*(1.04)/(0.10- 0.04)= $117,000
Equity Value = 117,000 - 67,000 = $50000
Debt to Value = 67000/117000
Debt to Value = 0.57265
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